No More Rep Letters

In my blog a couple of weeks ago, I talked about how the PCAOB seems to be taking the position that even if management says they did something, the auditor looks at the information and verifies that the accounting answer was indeed correct, that such documentation was not enough. That got me thinking about that age old key audit document – the management rep letter.

What is a management rep letter? It is a letter containing various statements from management about what they did, what judgments they made, and that the financial statements appropriately reflect all the information they know. But basically it is just management saying things – albeit in writing.

The question I started thinking about is what kind of audit evidence does a management rep letter provide? Well, apparently to the PCAOB, the answer is none. It has been made very clear, at least to the PCAOB, that “management saying something” is not sufficient audit evidence for anything in the audit. So that leads me to my next question. If a management rep letter provides no audit evidence, why are auditors still asking for them, and why is management still signing them?

I can think of a couple of possible answers. One is that the management rep letter has nothing to do with the gathering of audit evidence, but instead is a legal protection document for the auditor to be used in court if someone sues the auditor. The auditor can then point to management and say it’s their fault not mine. Of course, that makes me wonder what legal counsel would say about signing management rep letters.

The second option is that the management rep letter is actually valid audit evidence. Of course, if that were to be true, then management is being told a big lie by someone. If the management rep letter is valid audit evidence, then “management saying something” is sufficient audit evidence and instead of saying it isn’t, a more correct statement would be to say, it is adequate audit evidence for a limited number of items. Of course if that is the case, then management should be asking which items on the rep letter represent valid audit evidence, and the rest of the items should be eliminated from the letter.

While I’m not sure which of the two options above is right, I am sure that either way auditors have a lot of explaining to do to their clients about their request for a management rep letter.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s